Here’s a foreclosure avoidance strategy that you don’t hear about every day… or maybe ever.

This past year, Illinois foreclosure defense attorney, Rick Rogers of the Rogers Law Group, used the advantages of reverse mortgages to save his clients homes from foreclosure… and save their retirement, as well.

One of his clients, a 75 year-old woman, came to Rick’s firm with two mortgages on her home… a first for about $40,000 and a second for roughly $200,000. In truth, she couldn’t afford either one. Rather than trying to get her loans modified or fight the foreclosure through bankruptcy or other means, Rick turned to the idea of using a reverse mortgage to save her home… and leave her with no mortgage payments whatsoever.

“At 75 years old,” Rick explains, “she was able to borrow about 65 percent of her home’s current market value. Her home appraised for $200,000, so that gave her $130,000 with which to pay off the $40,000 first mortgage, and then we were able to show the holder of the second lien that it was in their best interests to accept the $90,000 remaining as total satisfaction of her second loan. She went from being at risk of losing her home to foreclosure to living in her home with no mortgage payments for the rest of her life. Pretty cool outcome, if you ask me… and I know she would agree.”

Rogers Law Group used the same strategy later in the year when a client came into the firm with an $820,000 mortgage that was severely underwater… the home appraised for approximately $350,000. Her lawyer was able to help her secure a reverse mortgage of $270,000, which the servicer saw as being the best they were going to do after the costs of foreclosing and liquidating the property as an REO.

“So, after the servicer agreed to accept the $270,000 as full satisfaction of the mortgage, she realized a savings of roughly $550,000 and for the rest of her life never has to make a principal or interest payment on her home. And, not only that but she went from living in a home seriously underwater to living in a home with about $80,000 in equity. I just don’t see how anyone can beat that,” Rick says with some well deserved pride.

Of course, Rick also points out that, “it’s not just a matter of going out and applying for a reverse mortgage, you have to someone negotiating with the lender or servicer so that they realize that it’s in their best interests to accept a settlement for less than the full amount of the indebtedness.”

How Reverse Mortgages Work…

To qualify for a reverse mortgage, borrowers have to be at least 62 years of age, and federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) are backed by the U. S. Department of Housing and Urban Development (HUD).

The amount you can borrow with a HECM depends on your age, the type of reverse mortgage you select, the appraised value of your home, and current interest rates… and your credit score is pretty much irrelevant, as I understand it.

In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you’ll be able to borrow, and reverse mortgages are not taxable, don’t affect your Social Security or Medicare benefits… and you retain the title to your home, without the need to make monthly repayments. Interest on reverse mortgages, however, is not deductible on income tax returns until the loan is paid off in part or whole.

You’re not required to repay the amounts borrowed through a reverse mortgage until the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, but in the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid.

You can change the way you receive payments from your reverse mortgage at any time for about $20, but the HECM reverse mortgage lets you choose from several different payment options, including…

The “term” option, which provides for fixed monthly cash advances for a specified period of time.

The “tenure” option, which provides fixed monthly cash advances for as long as you live in your home.

A line of credit that lets you draw down the loan proceeds at any time in amounts you choose.

A combination of monthly payments and a line of credit.

All HECM lenders must follow HUD rules, so the mortgage insurance premium is the same from lender to lender. Other loan costs, however, such as origination fees, interest rates, closing costs, and servicing fees vary among lenders, and because you retain title to your home, you’re still responsible for paying your property taxes, insurance, utilities, fuel, maintenance, and other expenses… and failure to pay property taxes, or carry homeowner’s insurance, or even maintain the condition of your home, may cause your loan to become due and payable.

Some reverse mortgages offer fixed rates, but most have variable rates that change with market conditions, and the amount you owe on a reverse mortgage grows over time as interest is charged on the outstanding balance. That means that the amount of your total debt increases as the funds are advanced to you and interest on the loan is added to your balance, so you may want to lower your upfront costs by borrowing a smaller amount, which can be done through a reverse mortgage referred to as a “HECM Saver.”

Of course, reverse mortgages can use up some or all of the equity in your home, which can result in fewer assets left to your heirs. If you or your heirs want to remain owners of the home when the loan becomes due, in general the loan must be repaid in full – even when the balance is more than the home’s value, and most reverse mortgages have a “non-recourse” clause, which means you or your estate can’t owe more than the value of your home when the loan becomes due.

Past Problems… Solved.

Although I wasn’t around to see it first hand, apparently the sales practices related to reverse mortgages have been problematic in past years. So today, to make sure that everything about a reverse mortgage is understood by the borrower, you’re required to meet with a counselor from a government-approved independent housing counseling agency before applying for a HECM. The counselor’s job is to explain the loan’s costs and implications, and make sure the potential alternatives to a HECM are understood and have been considered.

The counselor should also be able to help you compare the costs of different types of reverse mortgages, explaining how different options can impact the total cost of the loan over time. You can check online with HUD for a list of counselors or call 1-800-569-4287.

Obviously, reverse mortgages are not going to be an available path for many homeowners facing foreclosure, but for those 62 and older… who have equity in their homes… they can offer an answer and benefits that no other path can provide… and for those for whom a reverse mortgage fits, the outcome can be pretty darn wonderful.

If you’re a lawyer that represents homeowners or a broker, realtor or homeowner over 62 years old who wants more information on reverse mortgages, there’s only ONE company I’d call… IMPAC Mortgage, no question about it. IMPAC is the mortgage banker that didn’t take TARP funds, and modified loans for borrowers in order to protect shareholders and bondholders. And they have an entire division dedicated to reverse mortgages.

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